Reasons of State

Front matter

G. John Ikenberry

OIL POLITICS AND THE CAPACITIES OF AMERICAN GOVERNMENT

A volume in the series

Contents

The Limits of International Cooperation . The Limits of State Building

. The Limits of Technology and Spending . The Market as State Strategy

Com OO BP OF N m

Chapter One

The embargo on oil by the oil-producing states in the winter of 1973—74 together with the drastic rise in the price of oil have clarified like a stroke of lightning certain basic aspects of world politics which we might have understood theoretically simply by reflection but which were brought home by the drastic change in power relations which these two events imply.

Hans J. Morgenthau, 1975

The political and economic foundations of the Western world were shaken in the 1970s by an upheaval in international petroleum markets. A group of small, oil-producing nations in the Middle East engineered two momentous price shocks, in 1973—74 and 1979. To many observers at the time the rise of the Organization of Petroleum Exporting Countries, and the economic turmoil that surrounded it, marked a turning point in postwar history. The remarkable postwar expansion of the advanced industrial economies was at an end; no longer could governments promise unlimited economic growth. Nor could they retain exclusive control over the management of the world economy; developing countries, particularly those rich in resources, had to be brought into the system. Most important, American postwar leadership, already perceived to be on the wane, looked to have been dealt another, perhaps decisive, blow. An era was ending. The shape of the new one remained to be negotiated.!

1One contemporary historian, writing in 1975, argued that the economic and political turmoil generated by higher oil prices was “the opening stage of a struggle for a new world order, a search for positions of strength in a global realignment, in which the weapons (backed, naturally, by the ultimate sanction of force) are food and fuel.” Geoffrey Barraclough, “Wealth and Power: The Politics of Food and Fuel,” New York Review of Books, August 7, 1975, p. 23-

From the perspective of a later decade it seems there was less change than met the eye. The industrial nations weathered the oil price shocks, even if particular political leaders did not. The political and economic power of OPEC has come and gone. The prospect of far-reaching negotiations to advance the economic plight of developing nations has never appeared more fanciful.

Nonetheless, the oil price upheavals of the 1970s generated challenges that were real enough. They signaled not just higher energy prices but also a broader socioeconomic crisis, on a scale not seen for a generation, as they confronted the countries of the industrial world with a variety of dilemmas. The oil shocks cast up insidious problems—issues of energy security, economic adjustment, and leadership and cooperation within the industrial world. The international dilemmas were variously defined, and a host of policy responses were brought to bear on them. Cooperative international responses aimed at mitigating the severity and effects of price increases; they largely failed. Across the industrial world, government leaders pursued separate national policies, some more successfully than others.

The United States, though less dependent on imported OPEC oil than other industrial nations, was no less pressed to decide how to adjust its economy and society to new international energy markets. Higher energy costs engaged officials responsible for both foreign policy and domestic policy, and proposals for action found their way onto many different policy agendas. Across political and economic life, very little was beyond the reach of the oil price revolution.

International crises of this sort pose intriguing questions for students of politics. Crises are, as one analyst notes, “critical moments when national character and institutions [are] thought to be decisively tested.”? I share the conviction that political responses to crises can reveal essential characteristics of a nation’s institutions—their capabilities and their limitations.

In this book I am interested in two particular issues. One is the capabilities of nations and limitations on their cooperation to address the common dilemmas of the oil shocks. The possibilities for cooperation among the advanced industrial nations were obvious. Why did cooperation among oil-importing industrial nations prove so elusive? The other issue is the capabilities of politicians and executive officials, particularly in the United States, to direct the course of energy adjustment. What resources and mechanisms did American political leaders have at their disposal? In the case of American energy adjustment,

2Randolf Starn, “Historians and Crisis,” Past and Present 52 (August 1971), 9.

why were so many different courses of action pursued, and why did some fail and others succeed? As I trace the circuitous path of American adjustment, both international and domestic, I answer these questions, and my answers emphasize the shaping, constraining features of national political institutions and the organizational structure of policy making.

THE OIL PRICE REVOLUTION

October 17, 1973, the day of the Arab OPEC embargo, was “energy Pearl Harbor day.” In response to the outbreak of war between Israel, Egypt, and Syria, the Arab members of OPEC announced an embargo on oil shipments to countries supporting Israel. The United States, which was in the midst of approving emergency military assistance to Israel, was their primary target.1 OPEC members agreed to cut back oil production, and in the next two months world supplies dropped by about 9.8 percent. The price of oil traded on the spot market in Rotterdam rose from $6.71 a barrel in October to over $19 a barrel in December, and across 1974 the official price of OPEC oil rose from its pre-embargo level of about $3 a barrel to over $11 a barrel. A relatively stable petroleum regime, managed by the large oil firms and protected by American diplomatic and military strength, had collapsed.

In 1979, after several years of relative stability, prices again rose sharply. The second oil crisis began in late 1978 with a disruption in Iranian production sparked by domestic political upheaval. A short-term cutback in production by Saudi Arabia in January 1979 helped reduce world supply on a scale similar to 1973, and as before, prices moved rapidly higher. In the early months of 1979 spot market prices rose from $19 a barrel to $31 a barrel. By mid-1980 the weighted average of OPEC oil had moved to about $32 per barrel. In seven years crude oil prices, adjusted for inflation, had increased more than 500 percent.’

OPEC had dramatically reversed the terms of trade, and a massive transfer of wealth resulted. For oil-importing nations, price increases

38. David Freeman, Energy: The New Era (New York: Vintage, 1974), p. 1.

4See Federal Energy Administration, Office of International Affairs, U.S. Oil Companies and the Arab Oil Embargo: The International Allocation of Constricted Supplies, Report prepared for Subcommittee on Multinational Corporations of the Senate Committee on Foreign Relations, 94th Cong., ist sess., January 25, 1975, app. 1.

5For changes in oil prices see Philip K. Verleger, Jr., Oi! Markets in Turmoil: An Economic Analysis (Cambridge, Mass.: Ballinger, 1982), pp. 29-53.

Table 1. Current account balances of OPEC, OECD, and non-oil developing countries, 1973-1980 ($ billions)

Current account balances are surpluses or deficits on goods, services, and private transfers.

Source. OECD, Economic Outlook, various issues.

raised import costs and lowered real income. The oil revenues of the OPEC countries rose approximately $70 billion in 1974 alone; and the transfer of real income to OPEC countries amounted to about 2 percent of the gross national product of the member-states of the Organization for Economic Cooperation and Development. During the second oil price shock OPEC oil revenues rose about $180 billion. The transfer of income was again about 2 percent of OECD gross national product. Data on current-account balances between OECD and OPEC countries reflect in part the magnitude of the income transfers involved (see Table 1).

These oil crises were high drama at the time, but signs of an impending change in relations between oil producers and consumers appeared long before 1973. Behind the immediate actions taken by OPEC producers was a convergence of incremental changes in the international production and consumption of energy. Three trends were particularly important. First, a remarkable surge in economic growth in the mid- and late 1960s was shadowed by steady growth in energy demand across the industrial world. Second, the production costs of oil were very cheap, and oil gradually replaced coal as the preeminent source of energy. Finally, while other regions of oil production were nearing capacity, the Middle East and North Africa had almost limitless petroleum reserves.”

As oil became increasingly important to the Western economies and its production became geographically more concentrated, changes were occurring in relations between oil-producing governments and multinational oil companies. In the late 1960s and early 1970s a large number of independent oil companies began operations in regions

6See Stanley W. Black, “Learning from Adversity: Policy Responses to Two Oil Shocks,” Essays in International Finance no. 160 (Princeton, N.J., December 1985), p. 5.

7Joel Darmstadter and Hans H. Lansberg, “The Economic Background,” in Raymond Vernon, ed., The Oil Crisis: In Perspective, Daedalus 104 (Fall 1975), 16.

exclusively controlled and managed by the major firms. More companies began to compete for oil contracts, giving the producing nations new advantages in bargaining.’ By 1970, moreover, the posted price of Middle Eastern oil had declined every year in real terms since 1947 (except for several years in the mid-1950s).9 Host governments had reason to renegotiate prices with the oil companies.

In 1970 Libya demanded a new concessionary agreement with the major oil companies and, by threatening nationalization and cutbacks in production, extracted new price and tax arrangements. Standing behind Libya was OPEC. In 1968 OPEC had foreshadowed this new bargaining campaign, resolving that oil prices should keep pace with the prices of industrial products and that its members should determine prices and profit shares. Libya’s success and the other renegotiations that followed stemmed from the changing patterns of supply and demand noted above, together with fear of energy shortages in Europe, OPEC’s newfound resolve, and the willingness of independent petroleum companies to agree to terms previously unacceptable to the major firms.!°

Price increases would be the chief legacy of the October embargo. The attempt by Arab OPEC members selectively to embargo oil supplies failed, in large part because of the role the international oil companies continued to play in supply and distribution. Nonetheless, the OPEC challenge was perceived not just as an effort to redress longstanding economic grievances but as an attempt to alter the foreign policy of consumer nations. The threat was manifestly political as well as economic.

ENERGY ADJUSTMENT PROBLEMS

These shocks confronted Western importing countries with immediate demands to adjust their economies and address matters of energy security. Regarding issues of security of access, Western Europe and Japan were more threatened than the United States, even though the 1973 embargo was directed primarily at America. Almost all of Japan’s petroleum came from foreign (mostly Middle Eastern) sources, and almost 70 percent of the energy Japan required came in the form of petroleum. France also was highly dependent on OPEC

8See Raymond Vernon, “An Interpretation,” in ibid., pp. 1-14.

9Louis Turner, Oil Companies in the International System (London: Allen & Unwin, 1980), p. 125.

10Fdith Penrose, “The Development of Crisis,” in Vernon, The Oil Crisis, pp. 40-42.

oil; West Germany, with a substantial national coal industry, was less so.

Though their resources differed, the industrial importing nations faced a common set of international challenges. Most important, the industrial oil-consuming nations had a common interest in reducing demand in the international oil market. The disruptions of 1973—74 and 1979 involved only modest shortfalls in oil supplies, but both times the dramatic jump in oil prices, on the spot market and in the official prices posted by OPEC, resulted in part from the competitive scramble by users to protect themselves against loss of supply. Short-term incentives to hedge against the uncertainty of future supplies led governments and oil companies to bid up prices.

That it was a politically inspired embargo which triggered the first oil shock heightened the common Western perception that the immediate threat was to energy security. Yet economic adjustment to higher oil prices caused problems that were both broader and more profound, interacting with other long-term and cyclical problems and blurring boundaries between energy concerns and larger economic predicaments. As one study noted in 1976, “Increasing trade in petroleum and higher prices have given rise to complex economic transactions, providing every state with new opportunities for influencing other states, while making each more sensitive to the actions of others.”!! The price increases disrupted and disequilibrated a range of international markets and national economic systems. The challenges for governments involved adjusting national economies to higher energy prices and changing competititve positions.

The problems at this level were enormous. They included paradoxical macroeconomic problems—the price increases had both inflationary and deflationary effects on domestic economies. In the terms of traditional monetary and fiscal policy, as a result, the proper response was neither obvious nor straightforward. Traditional policy choices could address either inflation or unemployment, but they could not address both at once.!?

The high price of OPEC oil was also reflected in balance-of-payments deficits. Immediately after the embargo, government officials

'!Nazli Choucri, International Politics of Energy Interdependence: The Case of Petroleum (Lexington, Mass.: Lexington Books, 1976), p- 53.

12See Robert S. Pindyck and Julio J. Rotemberg, “Energy Shocks and the Macroeconomy,” in Alvin L. Alm and Robert J. Weiner, eds., Oil Shock: Policy Response and Implementation (Cambridge, Mass.: Ballinger, 1984), pp. 97—112. See the general discussion of the macroeconomic effects of the energy crises in Peter F. Cowhey, The Problems of Plenty: Energy Policy and International Politics (Berkeley: University of California Press, from all the major importing nations worried about the ability of particular nations to pay for higher-priced oil. Discussions began concerning emergency lending to nations in chronic deficit. American officials proposed a $25 billion Financial Solidarity Fund to supplement existing international monetary reserves for this particular form of adjustment. The problem of coping with such deficits also opened up a variety of subsidiary policy options. ! Payments deficits could be attacked, for example, by selling more products abroad or by restricting oil imports. In any case, problems of industrial competitiveness quickly became a part of the dilemma.!4

GOVERNMENT RESPONSES TO THE OIL SHOCKS

Across Europe and in Japan and the United States, national patterns can be detected in the attempts of government leaders to cope with the surge in oil prices. The divergent policies reflected differences in government priorities—whether states wanted macroeconomic adjustment and industrial competitiveness or security of energy supply, or had larger foreign policy objectives. Different emphases in turn reflected differences in objective economic circumstances, as well as differences in the policy instruments available. In the midst of a common shock, distinctive national policies emerged.

The French government emphasized national control over energy production and supply. This decision led to two initiatives. First, the French government addressed security of supply with a series of commercial agreements with OPEC producers, particularly the Saudi government. This initiative involved government-to-government, long-term commercial and barter contracts. Second, after 1973 the French government accelerated its already large commitment to civilian nuclear energy, embarking on the most ambitious nuclear power pro-

!3See Jan Tumlir, “Oil Payments and Oil Debt in the World Economy,” Lloyds Bank Review, July 1974, pp. 1—14, and Thomas O. Enders, “The Role of Financial Mechanisms in the Overall Oil Strategy,” Department of State Bulletin, March 10, 1975, pp. 312- 17. Efforts by the Interim Committee of the IMF are discussed in Robert Solomon, The International Monetary System, 1945-1976 (New York: Harper & Row, 1977), Chap. 17. On subsidiary options see Choucri, International Politics, pp. 55-58.

'4The literature on the economic impact of the oil shocks is vast. See, e.g., T. M. Rybczynski, ed., The Economics of the Oil Crisis (New York: Holmes & Meier, 1976); Edward Fried and Charles Schultze, eds., Higher Oil Prices and the World Economy: The Adjustment Problem (Washington, D.C.: Brookings, 1975); and Daniel Yergin, “Crisis and Adjustment: An Overview,” in Yergin and Martin Hillenbrand, eds., Global Insecurity: A Strategy for Energy and Economic Renewal (Boston: Houghton Mifflin, 1982), pp. 1— 28.

gram in Europe.!> By the end of the decade France was far more reliant than the United States, West Germany, and Japan on nuclear energy. In both respects the state was at the center of the French response.

Japan and West Germany emphasized the problems of industrial competitiveness and macroeconomic adjustment. Their policies were not confined to petroleum production but addressed industrial efficiency across sectors. Both countries launched a commercial offensive, attempting to balance payments by selling more exports, particularly to the oil-exporting countries of the Middle East. They also engaged in some industrial restructuring. Japan scaled down or phased out parts of such energy-intensive industries as aluminum and petrochemicals. Both countries also launched programs that would prove to be as important as actual restructuring, to encourage industrial energy efficiency.

The Japanese strategy was the product of specific steps to address the problems of inflation, balance-of-payments deficits, growth, and unemployment. From 1973 to 1975 the government pursued a tight monetary policy to address inflationary pressures. Through 1977 exports began to restore equilibrium to trade payments—helped by a depreciated currency and overall growth in world markets. In 1978 and 1979 normal levels of growth were restored. Adjustment entailed numerous programs for energy conservation and efficiency: research on new conservation technologies, tax incentives and low-interest loans, and conservation regulations all became part of the Japanese response. !6

The West German response was neither as elegantly formulated nor as coherently implemented. In many respects it involved an intensification of established economic policy, which worked to encourage

15On security of supply see Louis Turner, “Politics of the Energy Crisis,” International Affairs (London) 50 (July 1974), 404-15, and Horst Mendershausen, Coping with the Oil Crisis (Baltimore: Johns Hopkins University Press, 1976). On the general rise of oil trading by states see Aliro A. Parra, “The International Role and Commercial Politics of National Oil Companies,” OPEC Review 6 (Spring 1982), 1-13. See also Nicholas Wade, “France’s All-Out Nuclear Program Takes Shape,” Science 209 (August 22, 1980), 884-89.

16See Teruyan Murakami, “The Remarkable Adaptation of Japan’s Economy,” in Yergin and Hillenbrand, Global Insecurity; Richard Samuels, “The Politics of Alternative Energy Research and Development in Japan,” in Ronald A. Morse, ed., The Politics of Japan’s Energy Strategy (Berkeley: Institute of East Asian Studies, University of California, 1981), pp. 134-63; Robert Albota, “Japan’s Varied Responses to Energy Vulnerability,” International Perspectives, July-August 1981, pp. 16—19; Hirofumi Shibuta, “The Energy Crises and Japanese Response,” Resources and Energy 5 (1983), 129-54; and Masao Sakisaka, “Energy Alternatives: Present State and Future Problems,” Journal of Japanese Trade and Industry, November—December 1983, pp. 25—29.

stable and competitive export industries, and it was reflected in a willingness to let the economy absorb the price shocks. As John Zysman notes, “the required transfer of real resources out of consumers’ pockets and into exports was accomplished quickly and with limited inflationary consequences. Overall trade surpluses were maintained and bilateral balances brought back into the black at the same time that inflation was kept below other national rates.”!” The German response relied heavily on the adjustment mechanisms of the market, with government intervening to speed the process along. Within the energy sector itself, government strategy sought to strengthen but not to control energy companies.!8

In Japan and Germany energy adjustment was a form of industrial policy. The governments sought to work on the consumption side of the energy problem by encouraging industrial adaptation. They anticipated that a sustained and economywide adaptation would help export-oriented industries mitigate the effects of oil-price increases and that efficiency programs would reduce demand for imported oil.

EVOLUTION OF THE AMERICAN RESPONSE

The American response to the oil shocks was distinctive in several respects. First, the United States was the only country that initially sought a concerted, multilateral response to OPEC. Whereas other countries moved to adjust their internal economies to higher oil prices and to strengthen commercial ties to OPEC states, the United States worked to create a common bargaining position among consuming nations. Second, the United States was the only country that controlled domestic petroleum prices at the time of the first oil shock.!9 These price controls, the legacy of the Nixon administration’s antiinflation program, sheltered consumers from higher prices and made it difficult to use the market to push forward the process of adjustment. Under such constraints, government officials began the search for a workable response to higher oil prices.

17John Zysman, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change (Ithaca: Cornell University Press, 1983), p. 251; see also Edward N. Krapels, Pricing Petroleum Products: Strategies of Eleven Industrial Nations (New York: McGraw-Hill, 1982), pp. 131-35.

18See Dieter Schmitt, “West German Energy Policy,” in Wilfrid L. Kohl, ed., After the Second Oil Crisis: Energy Policies in Europe, America, and Japan (Lexington, Mass.: Lexington Books, 1982), p. 140, and U.S Department of Energy, Office of International Affairs, Energy Industries Abroad (Washington, D.C., September 1981).

19See Krapels, Pricing Petroleum Products.

International initiatives to coordinate the policies of industrial countries toward OPEC were launched by State Department officials in 1973, with the earliest efforts beginning prior to the October embargo. After the embargo, Secretary of State Henry Kissinger led the attempt to confront OPEC directly in order to roll back prices. Unable to achieve results through ministerial contacts with selected OPEC countries, American officials called for unity among importers. Kissinger hoped to coordinate the energy policies of the advanced industrial nations and, by so doing, jointly reduce oil consumption, thereby causing OPEC to moderate prices.

Although other Western government officials were skeptical, they met in conference at Washington in February 1974. The following November agreement was reached among seventeen advanced industrial countries (the French abstained) on the creation of the International Energy Agency. Kissinger had ambitious plans for the new international organization, but the IEA became a modest mechanism for contingency oil-sharing agreements and the exchange of information.2° It became a focal point for the many international schemes proposed to mitigate financial and import vulnerabilities. As a device by which to recapture the erstwhile petroleum order, however, the IEA fell far short of American hopes.

American international strategy shifted. Rather than confront OPEC directly in an effort to push back prices, the U.S. government adopted a more defensive posture, trying to facilitate a dialogue between consuming and producing nations in order to establish stable international oil prices. Kissinger, hoping to protect Western investments in energy development, proposed a “common floor price” for oil. He also suggested an international consortium to pool capital for energy investment as well as to conduct joint research and development. Such agreements among the consuming nations would, he thought, permit more constructive negotiations with OPEC on prices, stable markets, and petrodollar recycling. Again his proposal met with resistance from other consuming nations. His initiative for an oil price agreement was pursued into 1975, and led to proposals to negotiate agreements on other raw materials, but proposals to negotiate

20Other analysts give more weight to cooperative action by industrial oil-importing nations, particularly as instituted in International Energy Agency plans and programs. See Robert O. Keohane, After Hegemony: Cooperation and Discord in the World Political Economy (Princeton: Princeton University Press, 1984), pp. 217—40, and Ann-Margaret Walton, “Atlantic Relations; Policy Coordination and Conflict: Atlantic Bargaining over Energy,” International Affairs 52 (April 1976), 180—g6.

Io stable floor prices did not provide any headway on the ultimate American goal, which was to get OPEC to moderate or reduce oil prices.

Even before these international schemes had been played out, another set of initiatives began at the national level to make the U.S. government a direct participant in domestic energy production. In effect, the government would fashion for itself a new and enlarged role in the energy sector. The initial effort, unveiled as Project Independence, was an elaborate planning program to create the statistical and informational basis for policy making on energy conservation and production. The most ambitious proposal, the Energy Resource Finance Corporation, came in 1975 from the Ford administration and involved a massive federal finance authority to direct investment into alternative energy technologies. These programs, had they been successful, would have greatly enlarged domestic energy production.

Such initiatives envisioned a major reworking of the relationship between the federal government and the energy industry, but “institutional breakthroughs” did not occur. The ability of the government to plan, coordinate, and intervene in energy markets was not significantly expanded, despite considerable efforts by government officials and politicians. By the end of the decade the U.S. government was no more weighty a presence in the energy area than it had been at the beginning.

Although long-range planning and outright control remained elusive, a third type of energy adjustment policy did take root—federal spending programs aimed primarily at pushing forward new energy technologies. By the end of the decade the government was giving massive support to energy research and development. The disbursement of funds did not challenge the private organization of energy production, but it allowed modest administrative direction over the prospective development of alternative or advanced energy technologies. Congress was comfortable with the notion of spending money, and throughout the 1970s, government expenditures on energy R & D expanded quickly.

None of these strategies addressed an important underlying problem. Price controls and regulations in place prior to the 1973 shock kept domestic oil prices lower than international prices. These price controls shielded consumers from the full brunt of higher OPEC oil costs and provided cost advantages to domestic refiners. Indirectly they subsidized consumption and discouraged domestic production. Moreover, short-term responses to market dislocations extended the

II price and allocation rules. As government officials confronted energy adjustment, a full-blown regulatory apparatus (and the interests it served) stood squarely in the way of policy.

A return to market pricing in petroleum was not an alternative to the other policy responses. Indeed, the State Department premised its plans for international cooperation on full adjustment of the American economy to higher international oil prices. As other strategies fell short of expectations, however, the issue of oil pricing grew in importance. Decontrol was first made a central component of adjustment strategy in 1975, but Congress vigorously opposed the Ford administration’s announcement of a “presidential initiative to decontrol the price of domestic crude oil.”2! The Carter administration came to office opposing decontrol, but, to encourage conservation, quickly turned to the price mechanism. It proposed the Crude Oil Equalization Tax as a way to prevent domestic producers from reaping windfall profits while making U.S. consumers pay world prices. This imaginative attempt to create market conditions, at least on the demand side, failed before a skeptical Congress.

New international pressures in 1978 and 1979 led the Carter administration to embrace market pricing as the single most decisive form of government action available. The second round of OPEC price shocks and vigorous demands by oil-importing allies strengthened the move by executive officials toward decontrol. Oil pricing became increasingly embedded in larger and complex matters of foreign policy and international economics. In July 1978 foreign economic policy officials within the Carter administration maneuvered to link an American pledge on energy pricing to German and Japanese agreements to reflate their economies. Executive officials used foreign policy to redefine what was at stake in the decontrol proposal, effectively shifting the balance of power in the struggle among domestic groups over oil-pricing policy. These developments brought what was for energy policy the most important outcome of the decade: in April 1979 the decision to decontrol domestic prices was announced.

What had begun as an ambitious international agenda for cooperation ended with a decision to dismantle government regulation. American executive officials grudgingly scaled down their policy objectives. Unable to achieve cooperation among industrial nations, a group of executive officials had backed efforts to transform the state’s role in the energy sector and to distribute massive amounts of funds

21State of the Union Message, January 13, 1975.

I2 through existing channels. In the end, however, a government that appeared to have few alternatives embraced a return to market forces.

This final course of action had been unavailable at the time of the first oil shock, and it eventually succeeded largely because other strategies failed. Had price controls not been in place before 1973, the U.S. economy would have felt the full brunt of rising prices, which would have enforced the adjustments other nations took for granted. At the moment of crisis, however, the regulatory apparatus was too firmly established to be disassembled, and so the decontrol option was not available. The failure of other proposals in a sense cleared the ground for the market proposal; a logic of trial and error, largely implicit, was at work. The market strategy seemed to some unambitious, even a capitulation to private industry, but in fact served broad “state” goals. Moreover, the reimposition of market pricing was a formidable task for executive officials, who confronted entrenched consumer and industry interests.

The price shocks generated interlocking national and international problems. Executive officials made the national response to the energy crisis a matter of foreign policy significance, seeking to enlist allies in a coordinated Western strategy, but such initiatives hinged on the ability of public policy to influence the domestic consumption and production of energy. At various moments across the 1970s domestic and foreign policy proposals were intimately dependent on one another, even while the government departments concerned were largely separate.

What can we learn from the sequence of policy strategies? First, the shifts were not discrete, sequential movements. As noted above, international cooperative schemes envisaged substantial reductions in the American consumption of imported petroleum: an orchestrated lowering of oil imports by the industrial nations was to undercut OPEC pricing decisions. Thus the United States sought to minimize the costs of adjustment, but cooperative action would still have required government steps to dampen domestic consumption and spur production. Also, spending programs were proposed repeatedly throughout the decade, as were efforts to redefine the government’s role in the energy sector, which began long before international efforts collapsed. Finally many executive officials emphasized market adjustment from the very beginning of the crisis. Decontrol as an adjustment policy had to wait, however, until domestic and international circumstances evolved to emphasize it.